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Assume a company is considering buying 1 0 , 0 0 0 units of a component part rather than making them. A supplier has agreed
Assume a company is considering buying units of a component part rather than making them. A supplier has agreed to sell the company units for a price of $ per unit. The companys accounting system reports the following costs of making the part:
Per Unit Units
per Year
Direct materials $ $
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead, traceable
Fixed manufacturing overhead, allocated
Total cost $ $
Onehalf of the traceable fixed manufacturing overhead relates to supervisory salaries and the remainder relates to depreciation of equipment with no salvage value. If the company chooses to buy this component part from a supplier, then the supervisor who oversees its production would be discharged. If the company begins buying the part from a supplier, it can use freed up capacity to produce and sell more units of another product that earns a contribution margin per unit of $
What is the financial advantage disadvantage of buying units from the supplier?
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